John E. Pytte July 2, 2015

DebtChoosing Between Debt Consolidation And Bankruptcy

There are many people who are facing overwhelming debt. They are desperately seeking the best possible debt management strategy to handle their situation. Learning what is consolidation, as well as bankruptcy, are both options. Each has benefits that could work well in different situations.

Debt Consolidation

This happens when a person obtains a new loan and uses the money to pay off a number of old debts. This loan works best if it is at a lower interest rate than the old debts. Knowing what is consolidation could help a borrower save money on finance charges.

Benefits of Debt Consolidation

This is a way for a person to protect their reputation and credit rating. Bankruptcy is a matter of public record, but debt consolidation is a private matter. A debt consolidation loan will appear on a credit report. It is not likely to decrease a credit score. This is also a way to maintain access to credit. A person may be able to keep their credit cards. This could be valuable in case of a financial emergency. Depending on the level of debt, and any form of loan default status, giving up credit cards may be made part of the loan agreement. The once single monthly payment may fit easily into a budget that can't handle multiple loan payments. Knowing what is consolidation can help people free up more money each month.

Disadvantages of Debt Consolidation

There is a chance a person may end up paying excessive money for hidden fees as well as tax liabilities and more. A person could lose their property. Any property that was used as collateral such as a home or vehicle could be lost if the debt consolidation loan goes into default. If the debt consolidation loan has a cross-collateralization section, it could enable a lender to seize other property it has financed should the debt consolidation go into default. If a person's car payment is current, a lender may still be able to seize it if the lender has also provided a debt consolidation loan that went into default. There could also be negative tax consequences. Depending on a person's financial circumstances, any money they save from a debt consolidation could be classified as income by the IRS. This means taxes must be paid on it. Creditors regularly report settled debt to the IRS that is considered income.


This is a way to eliminate debts or restructure certain debts and have the protection of the federal bankruptcy court. The two types of bankruptcies that are most often filed are Chapter 13 and Chapter 7. A Chapter 7 bankruptcy permits the petitioner to eliminate many different types of debt. When a Chapter 13 bankruptcy is filed, the petitioner is able to restructure certain debt with a supervised repayment plan.

Benefits of Bankruptcy

Bankruptcy provides petitioners protection from their creditors. All collection efforts must cease. This means lawsuits, garnishments, phone calls and more will stop. It provides a fresh financial start. When a Chapter 7 bankruptcy is granted, the monthly crushing debt is eliminated. It is now possible to work on having financial savings. A Chapter 13 bankruptcy may enable a person to keep their real estate, vehicles and more at a reduced rate. It prevents foreclosures as well as vehicle repossession.

Disadvantages of Bankruptcy

Having debts restructured or eliminated as a result of a bankruptcy will have a negative impact on a credit rating. It will decrease the credit score. Any form of bankruptcy can stay on a credit report for up to ten years. This could make it difficult to obtain any type of loan in the future. Most loans made available after bankruptcy are usually offered at a high-interest rate.